A Word

With these challenging conditions and the advent of the holiday, I will likely be indisposed through the end of the year. Thanks for reading, and I'll see you in 2009.


Nein! For '09

CNBC has a stupid series of predictions for 2009. You know, reasonable stuff that won't seem ridiculous at all - poor Diana Olick is convinced the world is ending. Look at this hilariously misguided/bitter quote from her 9 for '09 column:

9. Should I Buy a House in 2009?

Yes, in fact, buy one for me. Unfortunately, during the housing boom, I chose to use a traditional mortgage product at a higher rate than all those fancy schmancy products that could have afforded me that really swank big tudor on the avenue. You know, the one with the massive chef’s kitchen/family room, the master suite with its own wet-bar and the back yard that could actually contain my son’s Big Papi-esque hitting capacity. I really wanted that house, but for some ridiculous reason I bought one at half the size and half the price, which leaves me still making my mortgage payments every month, unlike everyone else. I’m just SO uncool.

I'm sure folks on the dole maybe reading this in the library between bathroom towel-and-sink bathing sessions are super sympathetic! Sorry you couldn't get "bailed out" with the "middle class" you whiny, sad woman. How about you go home to your house that you were able to buy before your "middle class" compatriots pushed housing well out of the range of virtually all Americans through asinine loan products and qualification standards and maybe have a glass of eggnog! You'll feel better!

Exclamation points!

Anyway, I won't be making any major predictions from '09 beyond a Q3/Q4 jobless recovery and the re-emergence of inflation. My ego is as big as anybody else's that works in banking but it is delusional to think that anything can be reasonably predicted in this market environment. Hell, even my mini-dictions were fraught with qualifiers! We've got global stimulus programs of indeterminate size backing enormous depository bases with indeterminate risk changing at random intervals at the whims of large bald men with unprecedented access to America's central banking assets.

Anybody with a reputation to protect or assets to invest should view 2009 as a minefield. Anything you put on the internet can and will be used against you. If you're going to say anything opinion-based on a major financial news outlet, more than ever, do it boldly: it's best to be dismissed as a lunatic or hailed as a genius. With unprecedented volatility should come unprecedented claims, or silence. I choose the latter!


Suck it, Granola

Also, a note on low oil prices.

This is temporary. Get long oil (though I'm not sure when, timing the bottom will potentially be costly with oil's traditional/current/forever volatility)! Inflation alone will cause immense increases in the value of oil in late 2010.

Lots of people are saying this is a bad thing, particularly Green activists, but Fuck Them. I don't drive to work with a tankful of sunshine and happiness, and right now lower gas prices are a big, fat disposable income boost. I can use this money to invest, to buy products, to pay for services, etc. This is great for our economy.

The people who say it's bad are always sobbing about opportunity cost. They're kind of right - long term, renewable energy sources will be more "valuable" than oil could ever be, and regulatory/policy/industry delays in its implementation will likely cost us. I'm pretty okay with that argument. But markets don't care, and neither do I, because oil is cheaper by the minute right now and it's not like most consumers have any other transportation options.

And guess what? There's water all over the opportunity cost argument, because I (and this is me leaving the realm of the truly rational) honestly believe we've learned our lesson this time. One of the good aspects of the bailout of autos, if there are any, is that they will create immense political pressure to STAY GREEN in the transportation market. We have a President-elect who has promised us renewable/clean energy investments. It's too early to say if car behavior has truly been fundamentally altered, but my thought is that many Americans will remember hundred-dollar tanks of gas for their adult lives.

We'll see, right? But right now, this second, cheaper gas is great for me and for everyone who drives a car. So suck it, granola.

The Jobs Number Ends the Recession in 9-10 Months

The jobs numbers were really bad. But I think we're almost done with this whole recession thing. Here's why.

In economist lore, recessions are caused by inventory pressure. A normally-functioning economy produces boom-and-bust cycles in various markets, which overheat and eventually create such a buildup of a good or goods that the underlying jobs and corporate profits model behind the industry fails. The result is interconnected collapses in related industries and the reduction of GDP as output slows, inventories stagnate in warehouses, and asset valuations collapse.

A housing market bubble and consequent recession, like we just experienced, is especially insidious because the financial market behind it - almost all houses are purchased with mortgages, massive outlays of financial risk - ALSO experienced a credit inventory buildup that exacerbated the normal boom/bust housing cycle. These interdependent bubbles both grew larger and collapsed harder than they would have without the creation of fictional financial backing in the form of CDO's, SIV's, and Credit Default Swaps. The Federal Reserves constant piling of money supply in the boiler made this train wreck more painful than usual.

One usual characteristic of a bubble preceeding a recession is a massive hiring spree. Many economists have argued that this did not occur leading up to the Dec. 2007 recession, but in looking at the data I disagree - it's not that there wasn't an irrational hiring bubble, but it was camouflaged by sunny historical models of US labor markets and did not account for the fact that, without the fiction in housing/finance, the 2001-2002 recession would have been a jobless recovery.

Returning to 2002 lows means we're almost done. I would suspect that December and January will be ugly months after which we'll see growth and inflation moving disproportionately to each other - small returns in growth will be rewarded with exponentially larger spikes in inflation. That phenomenon will persist until our trade imbalances and immense debt exposure are brought to more appropriate levels. See the Volcker playbook from early in the Reagan administration.

We will also experience a "jobless" recovery until late in 2010, and the 2011 hiring season will be strong. Forecasting that far in the future is something of a leap in faith and nobody wants to hear this, but my thought is that underlying hiring strength will not emerge until Obama's 2009 infrastructure investments start showing returns in the form of nascent industry. I'm also predicating this largely on his Clinton Redux economic team's inevitable budget hawkishness and a largely centrist economic policy, because if he spends like he said he would we can just go ahead and trade our dollars for barter.


Bad News Bears - Jim Cramer Dooms Us All

“Enough with the hysteria,” Cramer said during Tuesday’s Mad Money, we’re not going to suffer another Great Depression.

Of all the things in the world that could bring me great worry and discomfort, this is it. I liked it better when Cramer was on the verge of tears, thus signifying a recovery. If you have to count on two things in life other then death or taxes go for the MSM getting finance wrong and Jim Cramer leading the way with a horrible call. I happen to agree with him - no Great Depression will be predicted by this blog - but I'm less comfortable when we're on the same side of an issue.

It was part of an oddly depressing day of announcements. The 25B Detroit bailout/bridge loan/welfare program with no change of passing or ever being repaid became separate multi-billion dollar bailouts amounting up to 34 billion. As a member of an industry famous for manufacturing pure, unadulterated fiction, I'm sort of appalled that the number rose so quickly in such a short span. They were also savvy enough to drive cars to the meetings and ask for dollars separately so the bailouts appear comparatively smaller, PR tricks with all the sincerity of Sarah Palin's dialect.

And, of course, the latest round of layoffs is hitting Wall Street. JP Morgan and BofA/ML announced big cuts today. The worst of it is that we're not done yet in financials with the job losses, not even close. It's going to be a lean Winter.


Bear Market Rally

Good news: the stock market thinks we're going to be fine.

Commodity and stock prices performed this week, indicating that portfolio managers have finally begun setting up their 2009 strategies by investing in US equities. The December/January period is the busiest period of the year for my folk - amidst the Holidays, you have a transformational event in the retail industry to analyze. Not only that, but investors typically really look at their portfolios in January and readily invest in the year set to unfold before them.

It used to be that you could do something called a "January arb." The markets used to have an irrational value spike in January as all the new portfolio money that was in cash got invested as everyone set up initial positions for the year. That's largely over now - it's slower, smaller, and starts in December.

But at least Santa will come, because investors this week watched stocks go up and built on it. That's an interesting phenomenon indicating that the worst may be over for your 401(k), if not the job market or the economy generally - markets values tend to precede depressions and the recovery starts in the indexes first. Economists are universal in their negative GDP forecasts for Q4. But going forward, there's a growing sense that late 2009 will bring healing and recovery, and a sense that this week's rally was an early investment on those happy returns.

My thought is that the recovery will be long and shallow. There will not be a satisfying, massive drop in unemployment or a big banner dropping to say "RECESSION OVER!" 2010's election characteristics will be the best test of how we'll we're recovering - the extent of voter attention on economic issues should be an interesting insight into national psychology. I suspect we'll find voters obsessed with the usual cornucopia of pointless bickering about flag pins and abortion, which would be a comfort.


The Unsteady Drumbeat

You can print all the dollars you want and invest them directly in Citigroup; nothing stops until the bad loans go away.

The economy underneath every major financial institution is crumbling like a sandcastle in a hurricane. GDP for Q4 is looking in the -3 to -5 range with lots of downside, employment figures have been shockingly bad, and earnings are going to be really ugly. There isn't a single performing asset class in debt, equity, treasuries. Investors are in full liquidation. Why?

Banks, the engine of our economy, are not lending money. LIBOR has come down and indicates less abject fear, but the volume of activity has not increased. If there's any lending going on, it's bank holding companies using the discount window.

Hank Paulson made an unforgivable judgment call by re-apportioning TARP funds as direct investments in banks. While initially hailed as an ideal solution, a number of important problems have emerged with that plan:

1.) Why bother getting cash from another bank if you can go right to the printer itself? The government's massive distortion of the interbank lending market cannot be overstated in scope. It has exacerbated the impact of the fear of "bad assets" taking down someone you lend to by creating a cushy alternative process!

2.) It's created an arbitrary system of winners and losers, where financials with no access to the funds are forced to become bank holding companies and smaller banks are brushed aside as Treasury tries to focus its limited (shockingly limited for 700B) resources on bigger, more "systemic" institutions.

This means that more stable, liquid small banks, once seen as the likely survivors in this mess, are getting slammed stock-wise because they won't be saved, which is scaring their bigger clients. We're stalling a run on big banks and fomenting one in local banks. Like I freaked out about a few months ago, FDIC may have a problem that is larger than its funds, and we're inviting that scenario.

3.) It hasn't prompted lending. Banks aren't lending because they're afraid that their contemporaries have bad assets on their books. With good reason, they do! TARP was supposed to change that. Instead, it's outright stated "There are bad assets and there are so many that we won't buy them because we don't have enough money." That's fucking horrifying, and Paulson is broadcasting that to the markets. What the hell? Even if he's right factually he's wrong strategically - if he'd have shut his mouth there's a chance the panic could have been resolved in a more orderly fashion.

Instead, we let people get scared and Citigroup got run on. Too bad "Bank of America" is already taken because that's what it's about to be. I wonder if the merger between it and the United fucking States will create any synergy opportunities?

4.) YOU DON'T CHANGE IT UP LIKE THIS! It's an unprecedented market out there; the government has, essentially, announced it's a got a 700B whack-a-bank hammer and I'm simply not going to invest until I know who's next. I have no idea if Hank Paulson is going to come on my television tomorrow and announce a Treasury default or the acquisition of Citigroup or The End of Foreclosure. How can I, as an investor, reasonably make investment decisions in this environment?

Personally I'm not putting a dollar in play until the banks write down every last L3 asset and structured debt obligation to a fraction of where it's at right now OR they have those assets graciously offloaded onto American taxpayers. Most people think investing is gambling and it normally isn't - but right now, thanks to Hank, it is. Right now, our financial system is Vegas without the waitresses, and nobody is going to touch it until order is restored.